How Much Have Obamacare Premiums Risen?

Not as much as news reports would lead you to believe

It has been well publicized that premiums for Obamacare insurance plans have been rising at a disturbing rate. Local news is filled with reports of 21.5%, 36.3%, and even higher price hikes. President Trump complained in February that Obamacare premiums "have increased by double and triple digits," even remarking that premiums in Arizona "went up 116% last year alone."

If the cost of buying insurance were really rising this rapidly, we'd have a reason for bipartisan agreement that the Obamacare insurance experiment is a failure. But the rise in Obamacare premiums isn't even close to the magnitude we are hearing about from reporters and politicians. And it is not because of fake news or dishonest discourse. It's because everyone is looking at what's for sale rather than what's being sold.

Not sure what the heck I'm talking about? Then consider the Nike Mag 2016, a sneaker touted as "sensing the foot and lacing itself," because, you know, it is so exhausting to tie your own shoes. Nike made less than a hundred pairs of these battery-powered, motor-driven sneakers, which now sell for an average of $26,000 a pair.

Suppose, for purposes of illustration, that before the Mag came to market, Nike had five lines of basketball shoes on the market. They sold for an average price of about $200. Then in 2016, it brings out the Mag. If healthcare reporters and politicians commented on these shoes, they would tell you that Nike prices have risen more than 2,000%. That's because they'd be calculating the average price of Nike's shoe offerings, as if people bought an equal number of each type of shoe. If you have five varieties priced at around $200 and one that's priced at $26,000, you'll have an average price of over $4,000.

But that's an insane way to describe the price of Nike basketball shoes. To know how much their basketball shoes cost, on average, we need to know what shoes people actually buy. With hundreds of thousands of people buying the $200 sneakers and a handful of people buying $26,000 sneakers, the average price of Nike's shoes won't be much more than $200.

To return to health insurance: Suppose there were three Obamacare insurance plans for sale in your city last year, priced at $200, $300 and $400 per month. Now imagine that this year's enrollment period arrives, and the three plans in your city are now priced at $200, $400 and $600. You would probably see a story on your local TV news station expressing dismay at the 33% increase in insurance premiums -- the average price having risen from $300 to $400. The problem with this news story is that it would be estimating the average price of insurance before the reporter knew what plans people bought.

Still not sure what I'm getting at? Suppose that last year, everyone bought a $300 plan, and this year everyone bought a $200 plan. The average price of insurance would have actually declined 33% -- not risen 33%. We can't know the average price of healthcare insurance until we know how many people enroll in which plans.

If pundits accounted for this difference between for sale and sold, then we would learn that the average price of Obamacare insurance has risen quite modestly in recent years. According to a study in Health Affairs, the price of Obamacare insurance premiums rose only 2% in 2015, and 3% in 2016, once you pay attention to which plans people actually enrolled in.

Next time you hear a reporter or politician bemoaning outrageous price increases on the Obamacare insurance exchanges, see if you can tell whether they are talking about insurance that's for sale or plans that have been sold. If they are not reporting on the insurance plans people actually choose, they're selling you a bill of goods.

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